Automated Crossdocking Process for a Lean Distribution Center

If You Want to Run a Lean Distribution Center, Consider an Automated Crossdocking Process

By John T. Phelan, Jr., P.E.

When considering the steps to make your facility leaner, reflect on what aggressive business leader Peter Drucker once said, "There is nothing so useless as doing efficiently that which should not be done at all." The elimination of waste has been the mantra for manufacturers implementing a lean program in their operations. Ensuring the highest quality processes resulting in minimal defects or errors is the cornerstone of Six Sigma philosophy. Books have been written, classes taught and certification programs administered tailored to the quest of streamlining production. For those of us that live solely in a distribution environment, we must look to the principles of lean or Six Sigma and find areas where they can be applied so that the mission of accurate, on-time and cost competitive distribution of goods can be achieved.

Implementing an automated crossdocking process in the distribution center would be a low hanging fruit when evaluating potential continuing improvement processes. By definition, crossdocking is the direct flow of goods from receiving to shipping thereby bypassing any of the storage, replenishment, picking or sorting activities while maintaining the value-added function of order consolidation.

In order to put an automated crossdocking system into operation, there are some critical requirements that must be met. Vendors supplying products to your DC must provide advanced shipping notices (ASN) along with appropriate unit labeling, either bar code or RFID. When shipments hit the receiving dock, they can be placed onto a conveyor, scanned, and the products will be validated against the ASN with appropriate routing instructions married to each unit. As a result of having an ASN, the Warehouse Management System (WMS) already knows what to expect the shipment and all of its contents and therefore will have already determined the destination of each unit as it is scanned and received into inventory. Should the unit need to go to storage, then a transaction in the Inventory Management System (IMS) would add the unit to the inventory and the unit would be routed to the proper storage area of the warehouse. However, if the unit is flagged to go to shipping and become consolidated into an existing order, then the conveyor would route the unit directly to the outbound shipping sorter.

In addition to vendors providing ASNs and also having the automated material handling system integrated with the WMS in place to support the crossdocking operation, vendors must also understand and provide the proper packaging and labeling to support the outbound shipping processes. Shipping sorters require specific labels in certain locations on the box or carton. The labels must also contain the data needed to support the sortation and order consolidation processes. Also, it is critical for customer satisfaction to partner with vendors and ensure that packaging of goods is consistent with the needs of the distribution center’s customers, whether the customers are consumers or retail stores.

With this basic understanding of an automated crossdocking operation, here are five advantages that should be considered in deciding whether to implement this system in your DC that parallel the principles of both lean and Six Sigma.

Advantage 1 – Reduced Cost per Unit Shipped

Since crossdocking bypasses the putaway, replenishment and order picking processes, the more products your operation can crossdock, the more labor savings you will recognize. Although every distribution center is different, even distribution centers for the same company, it can be conservatively estimated that the putaway, replenishment and order picking processes together make up at least 50% of the total warehouse operation expenses. In many cases, the percentage is over 75%.

Now imagine what would happen if you could put systems and processes in place to bypass all of that labor for 50% of your products that you ship with an automated crossdocking operation. By saving 50% of the total warehouse operation expenses for 50% of the products, the result would be a 25% savings in total warehouse operating expense. This savings would have a huge impact on the ever-so-important measurement in distribution centers; cost per unit shipped.

Other areas where the automated crossdocking operation would reduce the cost per unit shipped includes the reduction of effort needed to support the inventory process. Whether the DC does a physical inventory or cycle counting, by eliminating the number of products stored in inventory, the labor needed to ensure inventory accuracy will also be reduced.

Advantage 2 – Faster Lead Times to Customers and Retailers

Cost, Quality and Lead Times are typically the three main factors influencing purchasing decisions. Therefore, your company’s position compared to your competitors is determined by the performance of each of these factors. In a retail environment, especially during a high demand season, just having an item on the shelf is often enough of the competitive advantage needed to win a sale. “Out of stock” or “backordered” are terms that are rarely met with customer satisfaction, even if the item is scheduled to be restocked on the next day.

An automated crossdocking system is about as close to just-in-time delivery, or delivery-on-demand that a distribution center can provide their retailers or consumers. To be able to continue to add the value of order consolidation along with improved lead times will ensure that your business is doing its best to provide the highest level of service for these valuable customers.

Advantage 3 – Reduced Required Warehouse Space

By eliminating the number of products stored in inventory, the physical infrastructure needed, whether represented by square foot of warehouse space or material handling storage equipment like pallet rack or shelving, is also reduced or recaptured for other purposes.

This reduced square footage is not only beneficial from a real estate perspective, but it also helps improve day to day productivity. The value-added work provided by the warehouse labor staff includes activities such as receiving, putaway, order picking and consolidating. The non value-added work includes travel time. As an example, travel time exists when a warehouse worker has to replenish the order picking module with items pulled from a pallet located in the bulk storage area on the other side of the warehouse. By reducing the travel distance, the warehouse worker spends less time on the non value-added work and therefore improves productivity by being able to accomplish other value-added tasks.

Advantage 4 – Better Shipping Accuracy

The term “Six Sigma” originates from the degree of accuracy that processes should aspire to become. In statistical analysis, sigma is the standard deviation of a group of numbers. Six Sigma means that a process should provide acceptable results, results that fall within six standard deviations of the mean, so that there is only 1 defect in 3.4 million attempts.

As it relates to the distribution environment, the cause of errors is almost always a result of a human mistake. In designing new distribution centers or re-engineering existing distribution centers, material handling engineers focus on minimizing the number of touches required to support a specific operation or series of operations. The reason is because each touch poses the risk of an error occurring, even if the probability of the error is small, say 0.05%. That translates to an accuracy of 99.95% which on the surface seems pretty good. However, if in the lifetime of a single SKU that travels into and out of a warehouse, it is touched 5 times (receiving, putaway, replenishment, order picking and consolidation), the resulting accuracy is 99.95% multiplied by itself 5 times, which equates to 99.75%. On the other hand, if utilizing an automated crossdocking operation allows you to bypass the putaway, replenishment and order picking processes and the errors associated with these processes, the SKU is only touched twice which translates into an overall accuracy of 99.95% multiplied by itself twice, which equates to 99.9%. This may appear to be insignificant, but if your distribution center is shipping 20,000 items a day, the difference between 99.9% accuracy and 99.75% accuracy is 30 less errors. And 30 less errors mean 30 less labor intensive returns & restocking activities and 30 less unsatisfied customers.

Advantage 5 – Improved Financial Position

An automated crossdocking system can improve your three critical financial statements that are evaluated by your creditors; Profit and Loss Statement, Balance Sheet & Statement of Cash Flows. As previously discussed in Advantage 1 – Reduced Cost Per Unit Shipped, the automated crossdocking system can eliminate a significant portion of the warehouse operating expenses. As a result, either you can reduce your sales price and gain market share or you can maintain your current sales price and gain gross margin. Either way, you are bound to become more profitable.

Because the automated crossdocking system can reduce the required warehouse space, this can translate into reduced leased or purchased square footage in real estate. This reduction will help strengthen the balance sheet because if a square footage would be purchased, you would save on cash (short term asset) by purchasing less real estate or storage equipment (long term assets). If you were to lease the space, you would not have such a large long term liability in the form of the lease. Both scenarios provide stronger balance sheet ratios.

Finally, an automated crossdocking process can also be extremely beneficial to the Statement of Cash Flows. The reason is simple; items at rest stored in inventory do not create cash whereas an item in motion flowing efficiently through the distribution center does create cash. It is easier to think of those boxes that you distribute as being full of your cash, but you cannot take the cash out of the box until it gets loaded onto the truck at the shipping dock. Obviously a process that receives that box and then sends it directly to shipping in order to take the cash out is a better situation than putting that box on a shelf for a day or two before picking it and sending it to the shipping docks.

In summary, the benefits of an automated crossdocking system are often far exceeding the costs to put into operation, even when the system is implemented in an existing operation compared to a new facility. The system will provide lean methods to the distribution process and also help improve inventory and shipping accuracy by eliminating the possibility of errors induced from human touches. All of these improvements can be easily benchmarked and measured for continuous improvements. However, the ultimate measure of success will be the end result; more happy customers.

John T. Phelan, Jr., P.E. is Chief Operating Officer of TriFactor, LLC, a material handling systems integrator based in Lakeland, Fla. He can be contacted at 863-577-2243 or jjphelan@trifactor.com. For more information visit www.trifactor.com.

Special thanks to Accu-Sort Systems, Inc. for providing the graphics on this page. Accu-Sort scanners are used in crossdocking applications as well as many other material handling systems.